A good salesperson can sell $1,000,000 worth of goods,while a poor one can sell only $100,000 worth of goods.Job applicants know if they are good or bad,but the firm does not.A firm will offer job applicants a choice between a fixed salary or a 20% commission.Assuming risk-neutral salespersons and no opportunistic behavior,what level must the fixed salary be so that the firm can determine a prospective good salesperson from a poor one?
A)between $0 and $20,000
B)between $20,000 and $200,000
C)greater than $200,000
D)zero

Question

Quizplus · Accepted Answer

If a salesperson is good, he or she will sell $1,000,000 of goods. Therefore, if the commission is 20%, they will earn $200,000. Similarly, if a salesperson is poor, he or she will sell only $100,000 of goods, and earn a commission of $20,000. If the firm offers a fixed salary of more than $200,000, everyone will choose it. If it offers a salary lower than $20,000, everyone will choose the commission. Thus, the firm needs to offer a fixed salary between $20,000 and $200,000 to distinguish between a good and a poor salesperson.

A Good Salesperson Can Sell $1,000,000 Worth of Goods,while a Poor